A blog on strategies, and applying strategic perspectives on business related issues, and on miscellaneous discussions about China

2005-09-14

SDRC talk about oil prices

SDRC's Deputy Minister Zhang Guobao said, "China has been contemplating on fuel tax", but he then added "we have been waiting for the right opportunity when oil price is lower". He said China is not going to build up strategic reserve while oil price is at this level. He also admitted that there is a 30% difference between the price cap and world market price (Diesel in China is RMB1500-2000/ton cheaper)

Mr Zhang, there were plenty of such opportunities, i.e any single date from 1991-2004, and you and your predecessors messed up. You failed your job as a the "state planner". China became an oil importer in 1993, importing 1M tons. in 2004 crude oil import was 117M tons. Oil tax was first proposed in 1994 and approved by People's Congress in 1997.

But I was not being fair to Zhang. The problem is, in theory one will never be able to tell when the oil price is low. Perhaps SDRC should, instead of waiting for some subjective "low", set an objective (internal) measure, e.g. when oil price is at 52 week low, implement the tariff; or set a simple number of say, $40/barrel.

More importantly, it should first lift the price control and subsidy. Mr Zhang listed a variety of sectors which oppose the lifting of price control, from taxi, to farmer's machines, to the army vehicles. He was even concerned that taxi drviers will lose business if taxi price is raised. I will tell him what, more people will take the bus or subway, yes, traffic on taxi will decrease. Some of the taxi drivers will have to find another job, because lower oil consumption means cheaper oil, and hence more job opportunity from other industries (which are less affected by oil cost than the taxi industry). Why am I so confident there will be a net increase of job? Because the market is more efficient without having to pay for the "oil-subsidy-tax". What Zhang forgot to mention is that it is the average Chinese people (who take the bus or bikes) are subsidizing the taxi passengers and car drivers, when their tax is diverted into oil subsidy.

The bottom line is, some people in China are still not fully convinced that market will take care of itself. They tend to over-estimate their ability to "Plan", and forget their job is to "Reform", even though the name has been changed from NDPC (National Development and Planning Commission) into SDRC (State Development and Reform Commision). I would not blame SDRC for missing the opportunity to build up oil reserve, or to implement oil tax. We do not expect them to be George Soros. Even Soros makes mistakes. But I would blame them for pretending to be Soros, and for not learning from this lesson that they do not possess the ability to "plan". By subsidizing energy spending, SDRC has encouraged inefficiency, and severely damaged China's competitiveness in developing energy saving techonologies. One example is SDRC's favorite child, the auto industry. It is no surprise that hybrid car technology was developed in Japan, but never in US or China.